We’ve all had those moments of uttermost confusion when we couldn’t decide what we’d do in a tricky situation, haven’t we? When we’ve had to weigh out all the possibilities carefully, because we simply couldn’t tell what the consequences would be? Well, the Economists do this in a more refined fashion and they call it the ‘Game Theory’.
We were introduced to this particular idea by Prof. Abdul Quadir (Dept. Of Economics and
Finance) in a talk that he hosted on the 22nd of September. In simple words, Game Theory
refers to attaching certain probabilities to the responses of courses of action that one takes.
The fundamental question that it addresses is ‘What’s going to happen if I do so?’. Every
possibility is analysed and every reaction of other strategic players of the game is accounted
for. This was explained in more detail with the help of several examples. For instance, a very famous scene from the movie ‘A Beautiful Mind’ involves the character of the renowned Mathematician John Nash deliberating over ‘If we all go for the blonde…’, in a bar scene, where he explains what we call the Nash Equilibrium. The Prisoner’s Dilemma and the Final Problem (an attempt of Sherlock Holmes to escape from Prof. Moriarty, who’s trying to kill him) are two more such examples.
We also came to know of the bidding strategies that are employed in a Second Price Auction. The talk then progressed to Mechanism Design- which is game theory in reverse meaning that incentives are designed to encourage a particular outcome. There are a finite set of agents and each agent has some private information. A planner/mechanism designer takes decisions based on the (reported) private information; an allocation decision and a payment decision. The objective is to extract private information by providing different incentives. A mechanism is called Incentive Compatible if each agent knows that his best strategy is to follow the rules, no matter what the other agents will do –it is desirable because it promotes the achievement of group goals. This leads to the Revelation principle which states that if there is a mechanism with a non-truthful “equilibrium”, then there must be a direct mechanism with a truthful equilibrium achieving the same outcome.
A direct implication of this is that telling the truth is the observed strategy. Be it sponsored search auctions used by Google, of player auctions in IPL, or even the allocations of PS stations at BITS, the applications of Game Theory and Mechanism Design are very widespread and give one insight into the less-known aspects of arising conflicts.